Eleven years after the 2008 financial crisis the economic recovery remains the weakest of the Post-World War II era.
Economists have reached a common conclusion: In terms of average annual growth, the current expansion is by far the weakest of any since 1949, a position bolstered by some of the latest U.S. Department of Commerce’s GDP data.
A Brookings Institute study revealed some of the problems frustrating efforts to revive the U.S. economy — positive economic developments continue to be offset or neutralized by a series of unresolved negative factors.
Financial crises have occurred throughout history, but our most recent economic calamity has turned out to be one of the most confounding and perplexing events in our nation’s history. We’re bombarded daily with news reports painting a picture of a strong, thriving economy, while at the same there remains a worrisome amount of rather troubling data suggesting we’re on the wrong path. What are we to believe?
Mark Twain said, “History does not repeat itself, but it rhymes.” That’s doubly true for economic downturns, so there is much we can learn from taking a look back — identifying the elements or policies that were most effective in ending previous financial dilemmas and spurring on recovery, or the factors that prolonged recovery and clearly made things worse.
With that in mind, today we’ll examine one of the most successful economic recoveries seen over the last half century, the somewhat recent malaise known as the Asian Financial Crisis of 1997.
The Asian Crisis — and Lessons Learned
Like many financial downturns throughout the ages, the economic crisis in Asia came on the heels of several decades of outstanding growth throughout the region. But with the boom eventually would come the bust, and the first signs of overheating became evident in the form of large deficits and property and stock market bubbles.
First the currency markets started to slide, followed soon thereafter by stocks and equities, and these markets crashed harder and faster than anyone could have expected. Almost as fast came the realization they needed help, serious help. They needed someone to throw them a lifeline, and the International Monetary Fund and the World Bank came to the rescue.
Although some economists initially sounded the alarm on the economic solutions proposed by the IMF/WB, the at-risk Asian nations that embraced the bank plan quickly implemented a series of measures that ultimately put an end to the crisis known as the, “Asian Contagion”.
Notably, four key policies based on IMF/WB recommendations enabled local authorities to arrest a powerful downturn and end the economic scourge threatening the wellbeing of more than a billion people. They were:
- Interest Rate Normalization
- Limited Government Regulation
- Reduced Government Spending
- Limited or No Assistance to Insolvent Banks
With the adoption of these four measures the countries most affected by the crash were quickly able to revert to a path of effective policymaking and growth, spurring a strong, sustainable recovery that stands to this day.
The Necessity of Interest Rate Normalization
Monetary policymaking, which focuses on things like setting interest rates and controlling the supply of cash in the economy, can have immediate and often far-reaching impacts on society.
With regards to interest rates, economic literature and recent examples, including lessons learned from the Asian Crisis, indicate clearly that moderating or normalizing interest rates can be beneficial for a sluggish economy like ours but lowering rates to zero can predictably have the opposite effect. (Take a look at Japan’s lethargic economic trends over the last three decades to get a better idea of the harm zero-level interest rates can inflict on an economy.)
According to the Wall Street Journal, low interest rates can have severe consequences, something many Americans have discovered for themselves since 2008. Rather than boosting economic growth and consumer confidence, low rates tend to rattle financial markets, and can, over time, undo the plans of investors, businesses, and consumers.
Curbing “Legislative Fluff”
A decade after the 2008 financial crisis, countless reports have illustrated the consequences of overregulation.
Whenever government passes a new bill, lawmakers are prone to tout its relevance by saying it will “lift the economy.” Real-world results however have been quite different — rather than lifting the economy, overregulation has left large segments of the economy in the doldrums.
Some of the new regulations were based on the premise that the financial crisis was the result of deregulation. Yet many experts now agree deregulation itself was not a primary factor in the crisis, and instead point to bad policy making and lack of oversight on the part of government agencies.
For example, while one agency of government was taking steps to pressure and force banks into making mortgage loans to unqualified borrowers, other oversight agencies did little to better understand how these sub-prime loans were being repackaged and then sold on the secondary markets.
Holding the Reins on Government Spending
The current administration, like the one that preceded it, has been unable to resist the siren call of “cheap” government spending, attempting to cure a wide range of economic concerns with trillions of dollars of new debt aimed primarily at the securities and banking industries, a process poetically referred to as quantitative easing.
And while government programs may be effective in spurring short-term demand in the general economy, the rewards gleaned from an extended period of federal largesse are difficult to measure.
It took the U.S. government more than two hundred and five years to accumulate its first one trillion dollars in debt. But it took only another five years to add the second trillion to the ledger, and the most recent trillion was added in just a little less than 8 months.
By failing to live within its means the government has done a tremendous disservice to not only every living American but to their children and grandchildren as well, and it’s likely to take decades to repay the more than twenty-three trillion dollars in debt already on the books once a repayment program actually begins.
Most understand the act of borrowing is nothing more than taking something from the future. Debt allows you to have something today you would otherwise have to wait for, and therein lays the problem. Every dollar the government borrows today means less dollars in the future to pay for things like education, infrastructure, Social Security and Medicare.
Facing the Modern-Era Oxymoron: Saving Insolvent Banks
“Banks should be allowed to expand — and fail,” said Jamie Dimon, Chief Executive Officer of J.P. Morgan Chase, the country’s largest bank, during November of 2009, in the heat of the financial crisis.
Mr. Dimon’s assertion is correct, although some observers found suspicion in the CEO’s remarks, seeing in them a backhanded ploy to call for the elimination of rival, struggling banks while J.P. Morgan itself was benefitting from government largesse at the same time.
It requires no knowledge of economics to understand the current situation is a direct result, or consequence, of the government decision to look the other way on the massive fraud and lawlessness committed by the banking industry throughout most of the last decade.
In other words, by electing to bail out the banking industry and “too big to fail” Wall Street firms the government has, in effect, virtually guaranteed mediocrity for the rest of the economy.
Many are asking why our government reacted in the way it has. After all, is there any evidence U.S. fiscal policies have been effectual anywhere else in the real world, ever?
To the point, the leadership in D.C. is not just overlooking one or two of the IMF/World Bank directives — they instead have put our country on a course directly opposite of all four of the Asian remedies.
Four important questions:
Did we moderate or normalize interest rates here?
No, rates were cut down to almost zero practically overnight.
Have we cut down or held back in any way on the creation of new government regulations?
No, congress and the former president forced through a trillion-dollar overhaul of the healthcare system, while the current administration now promises to add to future economic uncertainty by seeking massive new trade agreements with the European Union and China.
Has government cut back on its enormous spending?
No, instead the government has more than doubled the debt in America to over 23 trillion dollars.
Did any of the big banks go out of business when the speculative and enormous wagers they made failed — did any banker go to jail?
No, they all were bailed out courtesy of the American taxpayer, and We the people, were left holding the bag.
Eleven years later, bag still in hand, many baby boomers wonder if they will ever again see the kind of economy they knew well while growing up — an economy where they could earn a reasonable return for a bank deposit, where the unemployment rate isn’t some kind of political “insider’s joke,” and where it doesn’t feel as though the next financial crisis could begin at any moment.
Take-Away
The history of America in the years since 2008 has been characterized by a remarkable, if not unusual, absence of political and economic leadership, and it has become increasingly clear that artificially low interest rates and record levels of government spending and overregulation are not a viable formula for recovery or sustainable growth.
While some have described the Asian recovery as a kind of economic miracle, I see it as little more than the successful application of a series of practical, common sense policy and fiscal measures, each chosen to produce a specific economic effect.
When you think about it, it really should come as no surprise these reforms were able to produce the kind of results they achieved — the real surprise is that U.S. policy makers continue steering the American ship of state in the wrong direction.
In a speech delivered at UCLA in March 1998, Deputy Managing Director of the IMF Stanley Fischer stressed the necessity of Asian reforms stating,
“It would not serve any lasting purpose for the IMF to lend to these countries unless these problems are addressed. Nor would it be in the countries’ interest to leave the structural and governance issues aside since markets would otherwise remain skeptical without having certain reforms in place.”
I think it’s clear Mr Fischer understood without specific reforms the World Bank ran the risk of winning the battle but losing the war. Furthermore, he and other officials understood intervention would undoubtedly put an end to the immediate crisis, but the lack of proper reforms in place could leave economies weak, barely able to stand on their own, and in constant need of new stimulus.
Don’t look now, but that sounds an awful lot like the kind of economic situation America finds herself in today.
Bureaucrats, and the entire country, can learn from the past. The examination of events like the Asian Crisis should provide a blueprint for policymakers in order to spur growth and instill confidence in the hearts and minds of consumers, especially retirees.
I think it’s time to reject Washington’s grand monetary experiment and completely overhaul D.C.’s fiscal policies in favor of adopting a series of common-sense, rational, reforms. Then, and only then, can we be assured of having the kind of economic growth, employment, and the capital investment necessary to ensure a modern and prosperous economy for this and future generations.
In the meantime, plan well.
